Business opportunity advice

Discussion in 'Growing and Managing a Business' started by RD8500, Dec 22, 2010.

  1. RD8500

    RD8500
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    I have an opportunity to go into a partnership, to buy rental properties
    My partner would fund the down payment (20%) and would arrange the financing. My responsibility would be all hands on, manage & maintenance etc. (Contractor\Carpenter by trade). It would be a 50% partnership split, after my partner is repaid the 20% down payment (from Cash flow \ Profits). What am I missing? Feels like a great opportunity to acquire property. Is the a good deal? Is the partnership structure right?
     
  2. ArcSine

    ArcSine
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    What you've described is certainly the classic "cash partner, know-how partner" arrangement.

    It sounds like you're contemplating a structure whereby postive cash flow (i.e., rental revenues, less all expenses incurred) comes out in three tiers...
    First (hopefully) servicing the debt (prin and int payments);
    Second, to partner as refund of down payment; and
    Third, 50 / 50 split between the two of you.

    Once the down payment has been repaid, the Second tier portion of the cash flow allocation goes away.

    If I've interpreted the foregoing correctly, there are some considerations you'll want to give a little thought-time to, and incorporate in the partnership agreement...
    • Are you going to be co-signed on the note, or is the financing solely in Partner's name?
    • How is negative cash flow to be handled? If one property (e.g.) is temporarily running red ink, who funds that shortfall?
    • Who makes the decisions as to what expenses are necessary w.r.t. a property, and which could be skipped?
    • Who decides when it would be favorable to sell a property, vs. continuing to hold it in the portfolio...and on what basis is that decision to be made?

    You'll certainly want to have your partnership agreement crafted by an attorney with a lot of experience in this area, because he/she has already thought of these four questions, and the other 44 questions that you and I wouldn't have remembered.

    As a general rule, try to think of issues for which your and your partner's motivations may diverge...and then make sure they are addressed in the agreement. Take, for example, the selection of a property to invest in. Your partner, with his name on the loan, may prefer one that looks to throw off immediate, and stable, cash flows (he wants to make sure the loan will be serviced, with a safety cushion to spare).

    You, on the other hand, may be leaning toward a different property, one whose cash flows are a bit less certain, but which holds--in your opinion--a substantially greater long-run appreciation potential (which you'd be sharing in, natch).

    Beyond all that stuff (which your attorney will help you cover, anyway), what you're contemplating could certainly be a rewarding opportunity. I think two very important points are to (1) do very thorough homework beforehand; and then (2) be very smart in which properties you add to the portfolio.

    Best of luck in your venture!
     
  3. RD8500

    RD8500
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    Thanks for your response. Down payment re-payment, shouldn’t I repay ½ back which then would assume my contribution had a value?
     
  4. Fergal

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    Welcome to our business forum RD8500.

    One thing you might want to think about is how long it will take before you start receiving cash from the business, and how long you will have to work without getting paid. It could take two years' or even more of rent to pay off the 20% down payment on a property, are you going to work without any payment during that time?

    Who will be responsible for attracting and managing tenants?

    Having some experience of dealing with rented properties, the actual maintenance of those properties often requires very little time, assuming you have good tenants and a reasonable standard of property to start with. Is there any reason why the properties in this business will require a lot of maintenance?

    In a similar vain to what ArcSine suggested, you will want to ensure that your partnership agreement provides for a situation where the market value of the properties you have invested in falls.

    By the way, what country will the business be based in?

    Good luck with it!
     
  5. ArcSine

    ArcSine
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    That's an excellent point from Fergal about running a cash flow projection on a property before you sign off on it --- it'll most likely be important for you to have a decent idea of what kind of personal cash flow income schedule and pattern you can expect from a property, before diving in.

    What did you have in mind re the 1/2 down payment aspect? Once your partner has recovered his out-of-pocket down payment from the property's profits, there's nothing left to repay. He has been "made whole" at that point, at least with respect to the down payment.

    Your contribution to the endeavor (or endeavour, for my UK amigos ;)) would be as described in your initial post, along with your contractor's expertise. There's nothing wrong with your also acting as a "cash partner" to some extent, should you so choose, but neither is it necessarily required.

    Ultimately, how the down payment is shared (or handled solely by one partner or the other) is decided by mutual agreement....just like how all the other aspects of the activity (e.g., arranging financing, maintenance work, rent collections, bookkeeping, etc.) are allocated among the partners by mutual agreement.
     
  6. himalshrestha

    himalshrestha
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    Its a great opportunity for you. but always think of the outcome in future rather in present.
     
  7. Marlow

    Marlow
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    It is a good patnership deal where both parties win but I want you to consider your patner's personality. Is it what you can work with,because the following days to come will be stressful & I believ u don't want your patner to be a sourc of stress to you
     
  8. Marlow

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    It is a good patnership deal where both parties win but I want you to consider your patner's personality. Is it what you can work with,because the following days to come will be stressful & I believ u don't want your patner to be a sourc of stress to you
     
  9. RD8500

    RD8500
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    (US) Partner is and would be a silent un involved partner, partner is also friend very successful, he is funding my endeavors to create work contracting\building is horrible. Even more important to make the right descisions. The repayment structure, am I right in thinking I should only repay 1/2 , again my contribution has value. thanks
     
  10. ArcSine

    ArcSine
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    My apologies, RD...I'm a bit unclear on the "repaying 1/2" part (haven't had my coffee yet).

    An oft-used arrangement in a scenario as you've described plays out as follows...

    The monthly rental revenue collected from the tenant is used in this order:
    • First, to make the monthly loan payment on the property
    • Second, to pay any operating expenses (repair parts, supplies, property tax, etc.)
    • Third, to repay your partner his 20% cash investment in the property
    • After Partner has been repaid his 20% down payment, then any excess rental revenue over Items 1 and 2 is split 50 / 50.

    Then when a property is sold, any net proceeds (the total selling price, minus closing costs such as commissions, and less the loan payoff amount) are also distributed 50 /50 to both of you.

    That's a basic framework, but there's plenty of flexibility to adjust the particulars to suit your needs. Say, for example, your partner is pretty liquid and doesn't need a quick refund of his 20% investment, and can instead let it ride for a while (in exchange for a suitable return, natch). In such case you might agree to skip Item 3 above, in the monthly cash payout hierarchy. Then when the property sells, Partner gets back his 20%, plus some return of X% on his investment, off the top (although after the agent's commission, and the bank's payoff, of course). The remainder of the net sales proceeds is then split 50 /50.

    The effect of this variation is to get cash into your hands a little sooner (in the monthly 50 / 50 distributions), and in exchange you're giving up something on the back end, when the property sells.

    Are you contemplating something materially different?
     

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